10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 16, 1999
UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to __________________
Commission file number: 34-0-26512
RenaissanceRe Holdings Ltd.
---------------------------
(Exact name of registrant as specified in its charter)
Bermuda 98-013-8020
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Renaissance House
8-12 East Broadway
Pembroke, Bermuda HM 19
(Address of principal executive offices) (Zip Code)
(441) 295-4513
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No____
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The number of outstanding shares of RenaissanceRe Holding Ltd.'s common stock,
par value US $1.00 per share, as of June 30, 1999 was 20,826,332.
Total number of pages in this report: 30
RenaissanceRe Holdings Ltd.
INDEX TO FORM 10-Q
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Part I - Financial information
Item 1 - Financial statements
RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Balance Sheets
(in thousands of United States Dollars, except per share amounts)
The accompanying notes are an integral part of these financial statements
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RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Operations
For the six months ended June 30, 1999 and 1998
(in thousands of United States Dollars, except per share amounts)
(Unaudited)
The accompanying notes are an integral part of these financial statements
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RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
For the six months ended June 30, 1999 and 1998
(in thousands of United States Dollars)
(Unaudited)
(1) Note - comprehensive income for the quarters ended June 30, 1999 and 1998
were $(6.9) and $1.0, respectively.
The accompanying notes are an integral part of these financial statements.
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RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
For the six months ended June 30, 1999 and 1998
(in thousands of United States Dollars in thousands)
(Unaudited)
The accompanying notes are an integral part of these financial statements
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RenaissanceRe Holdings Ltd., and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
(Unaudited)
1. The consolidated financial statements have been prepared on the basis of
United States generally accepted accounting principles ("GAAP") for interim
financial information and in accordance with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. The consolidated financial statements include the accounts of
RenaissanceRe Holdings Ltd. ("RenaissanceRe"), its wholly owned
subsidiaries, Renaissance Reinsurance Ltd. ("Renaissance Reinsurance"),
Glencoe Insurance Ltd. ("Glencoe"), Renaissance U.S. Holdings, Inc.
("Renaissance U.S.") and RenaissanceRe Capital Trust (the "Trust"). Other
related entities include DeSoto Insurance Company ("DeSoto"), a wholly
owned subsidiary of Glencoe; Nobel Insurance Company ("Nobel"), a wholly
owned subsidiary of Renaissance U.S.; and Renaissance Reinsurance of Europe
("Renaissance Europe"), a subsidiary of Renaissance Reinsurance.
RenaissanceRe and its subsidiaries are collectively referred to herein as
the "Company". All intercompany transactions and balances have been
eliminated on consolidation. Minority interests represent the interests of
external parties in respect of net income and shareholders' equity of
Glencoe and the Trust. Certain comparative information has been
reclassified to conform to current presentation. Because of the seasonality
of the Company's business the results of operations for any interim period
will not necessarily be indicative of results of operations for the full
fiscal year.
2. Significant Accounting Policies
a) Segment Reporting
-----------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which revises
disclosure requirements about operating segments and establishes standards
for related disclosures about products and services, geographic areas and
major customers. SFAS No. 131 requires that public business enterprises
report financial and descriptive information about their reportable
operating segments. The Company's reportable segments are the reinsurance
and primary insurance segments. The Company adopted SFAS No. 131 as of
December 31, 1998.
b) Derivative Instruments and Hedging Activities
----------------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal
years beginning after June 15, 2000. Currently, the
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Company does not expect the adoption of SFAS No. 133 to have a material
impact on its consolidated financial statements.
3. The Company utilizes reinsurance to reduce its exposure to large losses.
The Company currently has in place contracts that provide for recovery of a
portion of certain claims and claims expenses from reinsurers in excess of
various retentions and loss warranties. The Company would remain liable to
the extent that any third party reinsurance company fails to meet its
obligations. The earned reinsurance premiums ceded were $50.8 million and
$22.3 million for the six months ended June 30, 1999 and 1998,
respectively. Other than loss recoveries, certain of the Company's ceded
reinsurance contracts provide for recoveries of additional premiums,
reinstatement premiums and coverage for lost no claims bonuses which are
incurred when losses are ceded to those reinsurance contracts. Total
recoveries netted against premiums and claims and claim expenses incurred
for the six months ended June 30, 1999 were $78.5 million (for the six
months ended June 30, 1998 - $0).
Included in losses and premiums recoverable are recoverables of $38.1
million which are related to retroactive reinsurance agreements. In
accordance with SFAS No. 113 "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration," contracts are required to be included in
claims and claim expenses incurred as they become known. However, the
offsetting recoverable is deferred and reflected in the statement of
operations based on the recovery method. As of June 30, 1999, the Company
has deferred $21.0 million (as of December 31, 1998 - $27.6 million) of
recoveries related to a retroactive reinsurance contract. This has been
included in reinsurance balances payable on the consolidated balance sheet.
As the amounts are recovered, the recoveries will offset claims and claim
expenses incurred in the consolidated statement of operations. During the
first six months of 1999, the Company recognized $6.9 million as claim
recoveries under this contract.
4. Interest paid on outstanding loans was $3.1 million for the six month
period ended June 30, 1999 and $1.6 million for the same period in the
previous year. The increase in interest expense is due to additional
borrowings of $50 million in 1998 and $25 million in 1999. On March 1,
1999, the Company paid a semi-annual dividend on the Company obligated
mandatorily redeemable capital securities of a subsidiary trust holding
solely junior subordinated debentures of the Company ("Capital Securities")
of $4.3 million.
5. Basic earnings per share is based on weighted average common shares and
excludes any dilutive effects of options and restricted stock. Diluted
earnings per share assumes the exercise of all dilutive stock options and
restricted stock grants. The following table sets forth the computation of
basic and diluted earnings per share:
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6. The Board of Directors of the Company declared, and the Company paid, a
dividend of $0.35 per share to shareholders of record on each of May 28 and
February 18, 1999. On August 5, 1999, the Board of Directors declared a
dividend of $.35 per share payable on September 2, 1999 to shareholders of
record on August 19, 1999.
7. In May 1999, the Company announced a $25 million share repurchase program.
Through June 30, 1999 the Company repurchased 1,043,000 shares at a cost of
$36.1 million.
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Also, during the quarter, the Company repurchased $5.9 million of the
Capital Securities recognizing a gain of $.9 million, which was reflected
in additional paid-in capital.
8. As of December 31, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." The Company has
two reportable segments: reinsurance operations and primary operations. The
reinsurance segment provides property catastrophe reinsurance as well as
other reinsurance to selected insurers and reinsurers on a worldwide basis.
The primary segment provides insurance both on a direct and on a surplus
lines basis for commercial and homeowners catastrophe-exposed property
business. Also included in the primary segment are commercial auto and
general liability covers as well as surety business which provides coverage
to small and mid-size contractors. Segment data for the six and three month
periods ended June 30, 1999 and 1998 are as follows:
(in thousands)
Quarter ended June 30, 1999
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(in thousands)
Six months ended June 30, 1999
The activities of the Company's Bermuda and U.S. holding companies are the
primary contributors to the results reflected in the other segment. The
pre tax loss of the holding companies primarily consisted of interest
expense on bank loans, the minority interest on the Capital Securities, and
realized investment losses on the sales of investments, partially offset by
investment income on the assets of the holding companies.
9. On June 25, 1998, RenaissanceRe, through its U.S. holding company,
Renaissance U.S., completed its acquisition of the U.S. operating
subsidiaries of Nobel Insurance Limited, a Bermuda company ("Nobel
Limited"), for $56.1 million. The Company has accounted for this
acquisition using the purchase method of accounting.
Operating results of Nobel and its affiliates acquired by the Company have
been included in the consolidated financial statements from their date of
acquisition. As required by Accounting Principles Board Opinion No. 16,
the following selected unaudited pro forma information is being provided to
present a summary of the combined results of the Company and Nobel and its
affiliates assuming the acquisition of Nobel and its affiliates had
occurred as of January 1 of each year. The pro forma data is for
informational purposes only and does not necessarily represent results
which would have occurred if the
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acquisition had taken place on the basis assumed above, nor is it
indicative of the results of future combined operations.
As of June 30, 1999, the Company has entered into agreements which provide
for the sale and/or reinsurance of Nobel's principal business units.
Accordingly, future periods are expected to reflect a reduced impact from
Nobel and its affiliates.
10. The provision for income taxes is based on income recognized for financial
statement purposes and includes the effects of temporary differences
between financial and tax reporting. Deferred tax assets and liabilities
are determined based on the difference between the financial statement
bases and tax bases of assets and liabilities using enacted tax rates.
The Company has U.S. net operating loss carryforwards and future tax
deductions of $22.5 million which will be available to offset regular
taxable U.S. income during the carryforward period (through 2018), subject
to certain limitations. The tax benefits of these items are reflected in
the accompanying table of deferred tax assets and liabilities.
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Six months ended June 30, 1999 (in thousands)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June
30, 1999 are presented below:
(in thousands)
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following is a discussion and analysis of the Company's results of
operations for the three months and six months ended June 30, 1999 and 1998 and
financial condition as of June 30, 1999. This discussion and analysis should be
read in conjunction with the attached unaudited consolidated financial
statements and notes thereto and the audited consolidated financial statements
and notes thereto contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
General
The Company provides reinsurance and insurance where risk of natural catastrophe
represents a significant component of the overall exposure. The Company's
results depend to a large extent on the frequency and severity of catastrophic
events, and the concentration and coverage offered to clients impacted thereby.
In addition, from time to time, the Company may consider opportunistic
diversification into new ventures, either through organic growth or the
acquisition of other companies or books of business. In evaluating such new
ventures, the Company seeks an attractive return on equity, the ability to
develop or capitalize on a competitive advantage and opportunities that will not
detract from its core reinsurance operations. Accordingly, the Company
regularly reviews strategic opportunities and periodically engages in
discussions regarding possible transactions
RESULTS OF OPERATIONS
For the quarter ended June 30, 1999 compared to the quarter ended June 30, 1998
For the quarter ended June 30, 1999, net income available to common shareholders
was $24.0 million or $1.16 per share, compared to $28.5 million or $1.26 per
share for the same quarter in 1998.
Gross premiums written for the second quarter of 1999 and 1998 are as follows:
The 36.8 percent increase in written premiums for Renaissance Reinsurance was
the result of a 66.4 percent increase in premiums related to new business and
timing differences of recording written premiums in the Company's underwriting
system, a 32.1 percent decrease in premiums
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due to the Company not renewing coverage and a 2.5 percent increase related to
changes in pricing, participation level and coverage on renewed business. The
purchase of Nobel was completed in June of 1998, and accordingly premiums
written in the second quarter of 1998 do not reflect premiums generated by
Nobel. The decrease in premium volume in DeSoto is a result of existing
policyholders not renewing coverage. The decrease in written premiums for
Glencoe was primarily a result of the Company not renewing coverage on expiring
policies and also due to timing differences.
As discussed in the Company's 1998 10-K and it's 10-Q for the quarter ended
March 31, 1999, the Company is in the process of discontinuing or selling the
operations of Nobel. Accordingly, the Company expects a decrease in future
premium volumes, interest income, and related expenses. (see Financial Condition
- - Nobel).
During 1999, the Company continued to purchase reinsurance to reduce its
exposure to certain losses. During the second quarter of 1999, ceded premiums
written were $32.4 million, compared with $40.7 million for the same quarter in
1998. The decrease in reinsurance premiums ceded is a result of the 1999 ceded
premiums for Renaissance Reinsurance being more evenly distributed among
quarters, whereas in 1998 the majority of the ceded premiums were written in the
second quarter. Although ceded reinsurance reduces net premiums earned,
management believes that purchases of reinsurance significantly reduce the level
of risk to the Company that would otherwise exist.
The table below sets forth the Company's combined ratio and components thereof,
split by segment for the quarters ended June 30, 1999 and 1998:
Claims and claim expenses incurred for the quarter ended June 30, 1999, as a
percentage of net earned premiums, were higher for the Primary operations due to
the inclusion of Nobel, which because of the type of business written by Nobel,
generally results in a greater loss ratio than Glencoe and DeSoto. Also
contributing to the increase in the loss ratio of the primary business was a
reduction in net premiums earned by DeSoto due to timing differences. The
Reinsurance operations included net losses of $16.4 million or 33.7% of net
premiums earned, compared with $8.8 million for the same period in 1998 or 20.6%
of net premiums earned. The primary reason for the increase in net losses was
due to the recording of net reserves of $10 million related to two significant
catastrophe events occurring in the quarter, the Australia hail storms and
tornadoes in Oklahoma.
Underwriting expenses are comprised of acquisition expenses and operational
expenses. Acquisition expenses were $6.0 million for the quarter ended June 30,
1999 and $5.4 million for the same period in 1998. Operating expenses for the
first quarter of 1999 increased to $9.1
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million compared with $7.8 million for the same quarter of 1998. The primary
cause for the increase in operating expenses was an increase in operating costs
associated with the Company's primary operations, and certain one time costs,
including severance costs, related to Nobel and the discontinuance of the
majority of its operations.
Net investment income, excluding realized investment gains and losses, for the
second quarter of 1999 was $14.0 million, compared to $12.6 million for the same
period in 1998. The increase in net investment income reflects an increase in
invested assets and higher investment yields on the asset base.
Corporate expenses increased to $3.9 million for the quarter ended June 30,
1999, compared with $0.8 million for the same period in 1998. The increase
primarily relates to an additional write-off of $3.2 million of goodwill related
to the purchase of the operating subsidiaries of Nobel Limited.
Interest expense and minority interest for the quarter ended June 30, 1999
increased to $3.8 million from $3.2 million for the same period in 1998. The
increase was primarily related to the Company's purchase of the operating
subsidiaries of Nobel Limited, and the related borrowings under the revolving
credit facility and the term loan facility utilized for such purchase.
For the six months ended June 30, 1999 compared to the six months ended June 30,
1998
For the six months ended June 30, 1999, net income available to common
shareholders was $54.1 million or $2.57 per share, compared to $64.2 million or
$2.83 per share for the same period in 1998.
Gross premiums written for the six months ended June 30, 1999 and 1998 are as
follows:
The 29.5 percent increase in written premiums for Renaissance Reinsurance was
the result of a 46.0 percent increase in premiums related to new business,
timing differences and non-recurring business, a 21.2 percent decrease in
premiums due to the Company not renewing coverage and a 4.7 percent increase
related to changes in pricing, participation level and coverage on renewed
business. The purchase of Nobel was completed in June of 1998, and accordingly
premiums written in the first six months of 1998 do not reflect premiums
generated by Nobel. The 1998
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premium volume in DeSoto includes its initial assumption of approximately 12,000
policies and in force premium of approximately $10 million in the first quarter
of 1998.
As discussed in the Company's 1998 10-K and 10-Q for the quarter ended March 31,
1999, the Company is in the process of discontinuing or selling the operations
of Nobel. Accordingly the Company expects a decrease in future premium volumes,
interest income, and related expenses. (see Financial Condition - Nobel)
During 1999, the Company continued to purchase reinsurance to reduce its
exposure to certain losses. During the first six months of 1999, ceded premiums
written were $71.3 million, compared with $47.4 million for the same period in
1998. The increase in ceded premiums relates to increased purchases of $9.8
million by Renaissance Reinsurance, and the inclusion of Nobel, which ceded
$12.1 million of premiums in 1999 and is not reflected in the 1998 comparative
figures. Although ceded reinsurance reduces net premiums earned, management
believes that purchases of reinsurance significantly reduce the level of risk to
the Company that would otherwise exist.
The table below sets forth the Company's combined ratio and components thereof,
split by segment for the six months ended June 30, 1999 and 1998:
Claims and claim expenses incurred for the six months ended June 30, 1999, as a
percentage of net earned premiums, was slightly higher for the Primary
operations due to the inclusion of Nobel, which because of the type of business
written by Nobel, generally results in a greater loss ratio than Glencoe and
DeSoto. Also contributing to the increase in the loss ratio of the primary
business was a reduction in net premiums earned by DeSoto due to timing
differences. The Reinsurance operations included net losses of $28.5 million or
29.5% of net premiums earned, compared with $14.8 million for the same period in
1998 or 17.8% of net premiums earned. The primary reason for the increase
related to initial reserve estimates on events related to the 1999 year,
partially offset by reductions in reserves related to accidents occurring in
1997 and earlier. The Company recorded net reserves of $10 million related to
two significant catastrophe events occurring in the quarter, the Australia hail
storms and tornadoes in Oklahoma.
Underwriting expenses are comprised of acquisition expenses and operational
expenses. Acquisition expenses were $12.8 million for the six months ended June
30, 1999 and $11.8 million for the same period in 1998. Operating expenses for
the first quarter of 1999 increased to $18.6 million compared with $14.2 million
for the same quarter of 1998. The primary cause for the increase in operating
expenses was an increase in operating costs associated with the Company's
primary operations, and certain one time costs, including severance costs,
related to Nobel and the discontinuance of the majority of its operations.
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Net investment income, excluding realized investment gains and losses, for the
six months ended June 30, 1999 was $27.1 million, compared to $26.3 million for
the same period in 1998.
Corporate expenses increased to $7.9 million for the six months ended June 30,
1999, compared with $1.6 million for the same period in 1998. The increase
primarily relates to a write-off of $6.4 million of goodwill related to the
purchase of the operating subsidiaries of Nobel Limited.
Interest expense and minority interest for the six months ended June 30, 1999
increased to $7.4 million from $6.5 million for the same period in 1998. The
increase was primarily related to the Company's purchase of the operating
subsidiaries of Nobel Limited, and the related borrowings under the revolving
credit facility and the term loan facility utilized for such purchase.
FINANCIAL CONDITION
Liquidity and Capital Requirements
As a holding company, RenaissanceRe relies on investment income and cash
dividends and permitted payments from its subsidiaries to make principal
payments, interest payments, cash distributions on outstanding obligations and
pay quarterly dividends, if any, to its shareholders. The payment of dividends
by the Company's Bermuda subsidiaries to RenaissanceRe is, under certain
circumstances, limited under Bermuda insurance law. The Bermuda Insurance Act of
1978, amendments thereto (the "Act") and related regulations of Bermuda requires
the Company's Bermuda subsidiaries to maintain certain measures of solvency and
liquidity. As at June 30, 1999 the statutory capital and surplus of the
Company's Bermuda subsidiaries was $684.3 million, and the amount required to be
maintained was $101.0 million.
Glencoe is also eligible as an excess and surplus lines insurer in a number of
states in the U.S. There are various capital and surplus requirements in these
states, with the most onerous requiring Glencoe to maintain a minimum of $15
million in capital and surplus. In this regard the declaration of dividends from
retained earnings and distributions from additional paid-in capital are limited
to the extent that the above requirements are met. During the second quarter of
1999, Renaissance Reinsurance paid aggregate cash dividends of $21.6 million
compared to $28.9 for the same period in 1998.
The Company's U.S. insurance subsidiaries are subject to various statutory and
regulatory restrictions regarding the payment of dividends. The restrictions are
primarily based upon statutory surplus and statutory net income. The U.S.
insurance subsidiaries' combined statutory surplus amounted to $28.2 million at
June 30, 1999 and the amount required to be maintained was $24.1 million.
Nobel
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As previously announced, the Company recorded an after-tax charge of $40.1
million in the fourth quarter of 1998, related to the operations of Nobel and
its affiliates. As a result, the Company has been in the process of selling or
reinsuring the remaining Nobel businesses and reserves, including Nobel's
casualty, surety, low-value dwelling, claims adjusting and bail bond
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businesses. During the first six months of 1999, the Company completed the
reinsurance of the casualty and surety books of business and signed an agreement
under which its bail business will be assumed by a third party, with an
obligation to make payments in the future to Nobel based on the profitability of
the bail business. Also during the second quarter, Nobel completed the sale of
its IAS/Cat Crew subsidiary to its management team in an earn-out transaction.
Nobel also recently signed an agreement under which its low value dwelling book
of business will be assumed by a third party. A portion of the consideration may
be payable by the purchaser to Nobel based on the future revenues of the low-
value dwelling business.
The Company expects that Nobel and its affiliates will continue to conduct
certain functions of the casualty, surety, low-value dwelling and bail
businesses on a transitional basis. Renaissance U.S. expects to retain ownership
of Nobel along with its licenses in the 50 states of America although there can
be no assurance that such licenses can be successfully maintained following such
sales.
Cash Flows
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The Company's operating subsidiaries have historically produced sufficient cash
flows to meet expected claims payments and operational expenses and to provide
dividend payments to RenaissanceRe. RenaissanceRe's subsidiaries also maintain a
concentration of investments in high quality liquid securities, which management
believes will provide sufficient liquidity to meet extraordinary claims payments
should the need arise. Additionally, the Company maintains a credit facility
from which $125 million is currently unborrowed and available to meet the
liquidity needs of the Company.
Cash flows from operating activities for the six months ended June 30, 1999
resulted principally from premium and investment income, net of paid losses,
acquisition costs and underwriting expenses. Cash flows from operations in the
first six months of 1999 were $53.1 million, compared to $69.5 million for the
same period in 1998. The reduction is primarily related to increased payments
on the Company's ceded reinsurance and an increase in written premiums which
have yet to be collected. The Company has produced cash flows from operations
for the full years of 1998 and 1997 significantly in excess of its commitments.
To the extent that capital is not utilized in the Company's reinsurance
business, the Company will consider using such capital to invest in new
opportunities or will consider returning such capital to its shareholders.
Because of the potential high severity and low frequency of losses on the
coverages written by the Company, and the seasonality of the Company's business,
it is not possible to accurately predict the Company's future cash flows from
operating activities. As a consequence, cash flows from operating activities may
fluctuate, perhaps significantly, between individual quarters and years.
Reserves
During the six months ended June 30, 1999 the Company incurred net claims of
$36.7 million and paid losses of $75.1 million. The Company's policy of
purchasing reinsurance protections continues to have a favorable impact on net
incurred claims. Due to the high severity and low
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frequency of losses related to the property catastrophe insurance and
reinsurance business, there can be no assurance that the Company will continue
to experience this reduced level of losses.
For the Company's reinsurance operations, estimates of claims and claim expenses
are based in part upon estimation of claims resulting from catastrophic events.
Estimation by the Company of claims resulting from catastrophic events based
upon its own historical claim experience is inherently difficult because of the
Company's short operating history and the potential severity of property
catastrophe claims. Therefore the Company utilizes both proprietary and
commercially available models, as well as historical reinsurance industry
property catastrophe claims experience, for purposes of evaluating future trends
and providing an estimate of ultimate claims costs.
With respect to both the Company's reinsurance and primary operations, the
Company uses statistical and actuarial methods to reasonably estimate ultimate
expected claims and claim expenses. The period of time between the reporting of
a loss to the Company and the settlement of the Company's liability may be
several years. During this period, additional facts and trends may be revealed.
As these factors become apparent, case reserves may be adjusted, sometimes
requiring an increase in the overall reserves of the Company, and at other times
requiring a reallocation of IBNR reserves to specific case reserves. These
estimates are reviewed regularly and such adjustments, if any, are reflected in
results of operations in the period in which they become known and are accounted
for as changes in estimates.
Capital Resources and Shareholders' Equity
The total capital resources of the Company as at June 30, 1999 and December 31,
1998 was as follows:
The Company has a $200 million committed revolving credit and term loan
agreement with a syndicate of commercial banks. Interest rates on the facility
are based on a spread above LIBOR and averaged approximately 5.5 percent during
the first six months of 1999 (6.3 percent for the same period in 1998). The
credit agreement contains certain financial covenants including requirements of
a consolidated debt to capital ratio of 0.35:1; a consolidated net worth of not
less
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than 125 percent of consolidated debt; and 80 percent of invested assets to be
rated BBB- or better. The Company was in compliance with all the covenants of
this revolving credit and term loan agreement as at June 30, 1999.
In connection with the Company's purchase of Nobel in June 1998, Renaissance
U.S. has a $35 million term loan and $15 million revolving loan facility with a
syndicate of commercial banks. Interest rates on the facility are based upon a
spread above LIBOR, and averaged approximately 5.8 percent during the first six
months of 1999. The Credit Agreement contains certain financial covenants, the
primary one being that RenaissanceRe, as the principal guarantor, maintains a
ratio of liquid assets to debt service of 4:1. This five year term loan has
mandatory repayment provisions approximating 25 percent in each of years two
through five. The Company was in compliance with all the covenants of this term
loan and revolving loan facility as at June 30, 1999.
The Capital Securities pay cumulative cash distributions at an annual rate of
8.54 percent, payable semi-annually. The Indenture relating to the Capital
Securities contains certain covenants, including a covenant prohibiting the
payment of dividends by the Company if the Company shall be in default under the
Indenture. The Company was in compliance with all of the covenants of the
Indenture at June 30, 1999.
During the first six months of 1999, shareholders' equity decreased by $4.1
million, from $612.2 million at December 31, 1998 to $608.1 million at June 30,
1999. The significant components of the decrease included an increase in the
unrealized depreciation on investments of $11.1 million, payment of dividends of
$14.8 million and the repurchase of shares of $35.1 million, partially offset by
net income from continuing operations of $54.1 million.
Investments
The table below shows the aggregate amounts of investments available for sale,
equity securities and cash and cash equivalents comprising the Company's
portfolio of invested assets:
The Company's current investment guidelines call for the invested asset
portfolio, including cash and cash equivalents, to have at least an average AA
rating as measured by Standard & Poor's
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Ratings Group. At June 30, 1999, the invested asset portfolio had a dollar
weighted average rating of AA, an average duration of 2.5 years and an average
yield to maturity of 6.50 percent, prior to investment expenses.
All fixed income securities in the Company's investment portfolio are classified
as securities available for sale and are carried at fair value. Any unrealized
gains or losses as a result of changes in fair value over the period such
investments are held are not reflected in the Company's statement of operations,
but rather are reflected in accumulated other comprehensive income in the
consolidated statement of shareholders' equity, in accordance with SFAS No. 115
and 130.
As at June 30, 1999 the Company held investments and cash totaling $947.1
million with a net unrealized depreciation balance of $16.2 million. The
Company's investment portfolio, is subject to the risks of declines in
realizable value. The Company attempts to mitigate this risk through the
diversification and active management of its portfolio.
At June 30, 1999, $8.2 million of cash and cash equivalents were invested in
currencies other than the U.S. dollar, which represented less than 1 percent of
the Company's invested assets.
Derivative Instruments
The Company has assumed risk through catastrophe and weather linked securities
and derivative instruments under which losses could be triggered by an industry
loss index or natural parameters. For the six months ended June 30, 1999 the
Company's activities with respect to these securities has approximated $0.7
million of fees and risk premiums. To date the Company has not experienced any
losses from such securities or derivatives. The Company may in the future also
utilize other derivatives.
Effects of Inflation
The potential exists, after a catastrophe loss, for the development of
inflationary pressures in a local or regional economy. The anticipated effects
on the Company are implicitly considered in the Company's catastrophe loss
models. The effects of inflation are also considered in pricing and in
estimating reserves for unpaid claims and claim adjustment expenses. The actual
effects of this post event inflation on the results of the Company cannot be
accurately known until claims are ultimately settled.
Year 2000 Readiness Disclosures
Certain computer programs and embedded computer chips use only the last two
digits to refer to a year. Therefore, during computer operations, the "00" may
be interpreted as being the year 1900, instead of the Year 2000. If not
corrected, many computer systems could fail or create erroneous results.
Computer systems, equipment and programs that are free from the Year 2000
problem are generally referred to as being compliant.
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Year 2000 - Internal Systems
The Company has completed an assessment of its internal business applications
and computer systems, including those used in underwriting, policy processing
and recording policy details. The Company believes that all critical business
applications and systems will function properly with respect to dates in the
Year 2000 problem. The Company has backup systems in place for power, certain
infrastructure facilities and computer systems in the event of such system
failures. While there can be no assurance that these systems will be free from
failure, the Company believes that any failure from its internal systems will
not materially impact the Company's results of operations or financial
condition.
Year 2000 Exposure from Third Parties; Contingency Plan
The Company has evaluated its potential exposures from the non-compliance, if
any, of its vendors' and customers' systems with the Year 2000. The Company
does not believe that there will be any significant disruption of business from
such vendors and customers. However, there can be no assurance that the systems
of its vendors and customers, on which the Company relies on for supporting
information and certain services, will be Year 2000 compliant and will not have
an effect on the Company's business operations, financial results or financial
condition.
The Company has a contingency plan in the event that certain communication
systems, key utilities, or vendor systems prove not to be Year 2000 compliant.
However, the Company realizes that any reasonable contingency plan cannot
accurately account for all possible scenarios which may arise as a result of
Year 2000 related computer problems. The Company continually evaluates the
status of its Year 2000 exposures and modifies its contingency plan as needed.
Year 2000 Policy Coverage
In addition to the risks and costs associated with its internal systems and
third party vendors, the Company continues to evaluate its underwriting risk
arising from potential losses associated with Year 2000 failures. Variables
which may affect the pervasiveness and severity of Year 2000 problem include,
but are not limited to, the magnitude of the amount of costs and expenses
directly attributable to Year 2000 failures, the portion of such amount, if any,
that constitutes insurable losses, and the extent of governmental intervention.
Moreover, standard insurance and reinsurance contracts neither explicitly
include nor explicitly exclude coverage for Year 2000 failures. The Company
does not believe that Year 2000 losses should be covered under the standard
forms of contracts that it provides. However, some Year 2000 related losses may
or may not be determined to be covered under standard insurance and reinsurance
contracts, depending upon the specific contract language, the applicable case
law, and the facts and circumstances of each loss. The Company's Year 2000
initiative seeks to minimize its potential Year 2000 underwriting exposure by
(1) performing an underwriting evaluation of potential Year 2000 exposures; (2)
declining to renew certain contracts where the Company believes the potential
risk from Year 2000 losses is too great, and (3) structuring reinsurance
contractual language to mitigate potential exposure. The Company cannot be
certain that these steps will adequately minimize its Year 2000 underwriting
exposures, and given the possible magnitude of the Year 2000 problem, the
Company may incur Year 2000 insurance coverage related losses.
-23-
The Company believes it is taking reasonable and appropriate measures in the
course of its business operations and client relationship to avoid or mitigate
such Year 2000 related exposures.
-24-
Current Outlook
It is anticipated that the competitive pressures that have existed since 1995
will continue during the remainder of 1999. During the past four years, these
pressures have suppressed the premiums for property catastrophe coverages.
However, partially as a result of the $10.1 billion of U.S. catastrophe losses
reported in 1998 as estimated by Property Claims Services, the Company believes
that the rate reductions, which have been evident in the past four years, are
beginning to subside. Also, the Company believes that opportunities in certain
select markets will continue to exist, which because of the Company's
competitive advantages, including its technological capabilities and its
relationships with leading brokers and ceding companies, will enable the Company
to find additional opportunities in the property catastrophe reinsurance
business that otherwise would not be available.
The Company also believes that its purchase of reinsurance protection will
increase during the year. This is partially due to rate increases on certain
policies that the Company accessed for protection during 1998, plus additional
protection which the Company believes it will purchase during the year.
The Company announced an additional $25 million share buyback in May 1999.
Although any share repurchase activity is subject to market conditions, if the
Company were to complete these repurchases, such repurchases could reduce the
Company's interest income in the future.
The Company has entered into agreements which provide for the sale and
reinsurance of Nobel's principal operating units. Accordingly, the Company
believes that its future consolidated results will reflect a reduced impact from
Nobel and its affiliates. During the first six months of 1999, the Company
recorded $26.6 million of gross written premiums, $14.4 million of net premiums
written and net income of $0.2 million related to Nobel and its affiliates. The
Company expects that Nobel and its affiliates will continue to conduct certain
functions on a transitional basis, and that the Company will continue to
maintain ownership of Nobel along with its licenses in the 50 states of America
although there can be no assurance that such licenses can be successfully
maintained.
The Company's financial strength has enabled it to pursue opportunities outside
of the property catastrophe reinsurance market into the catastrophe exposed
primary insurance market. The Company believes that its financial strength will
enable it to continue to pursue other opportunities in the future. There can be
no assurance that the Company's pursuit of such opportunities will materially
impact the Company's financial condition and results of operations.
During recent fiscal years there has been considerable consolidation among
leading brokerage firms and also among the Company's customers. Although
consolidations may continue to occur, the Company believes that its financial
strength, its position as one of the market leaders in the property catastrophe
reinsurance industry and its ability to provide innovative products to the
industry will minimize any effect on the Company's business.
Note on Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Exchange Act. Forward-looking statements are statements other than historical
information or statements of current condition.
-25-
Some forward-looking statements may be identified by use of terms such as
"believes," "anticipates," "intends," or "expects." These forward-looking
statements relate, among other things, to the plans and objectives of the
Company for future operations. In light of the risks and uncertainties inherent
in all future projections, the inclusion of forward-looking statements in this
report should not be considered as a representation by the Company or any other
person that the objectives or plans of the Company will be achieved. Numerous
factors could cause the Company's actual results to differ materially from those
in the forward-looking statements, including the following: (i) the occurrence
of catastrophic events with a frequency or severity exceeding the Company's
estimates; (ii) a decrease in the level of demand for property catastrophe
reinsurance, or increased competition in the industry; (iii) the lowering or
loss of one of the financial or claims-paying ratings of the Company or one or
more of its subsidiaries; (iv) risks associated with implementing business
strategies of the Company; (v) uncertainties in the Company's reserving process;
(vi) failure of the Company's reinsurers to honor their obligations; (vii)
actions of competitors including industry consolidation; (viii) loss of services
of any one of the Company's key executive officers; (ix) the passage of federal
or state legislation subjecting Renaissance Reinsurance to supervision or
regulation including additional tax regulation, in the United States or other
jurisdictions in which the Company operates; (x) challenges by insurance
regulators in the United States to Renaissance Reinsurance's claim of exemption
from insurance regulation under the current laws; (xi) changes in economic
conditions, including currency rate conditions which could affect the Company's
investment portfolio; (xii) risks relating to the Year 2000 issue; or (xiii) a
contention by the United States Internal Revenue Service that the Company or
Renaissance Reinsurance is engaged in the conduct of a trade or business within
the U.S. The foregoing review of important factors should not be construed as
exhaustive; the Company undertakes no obligation to release publicly the results
of any future revisions it may make to forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
-26-
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Sensitive Instruments
The Company's investment portfolio includes investments which are available for
trading purposes and which are subject to changes in market values with changes
in interest rates. The aggregate hypothetical loss generated from an immediate
adverse parallel shift in the treasury yield curve of 100 basis points would
cause a decrease in total return of 2.5 percent, which equates to a decrease in
market value of approximately $23.1 million on a portfolio valued at $922.4
million at June 30, 1999. An immediate time horizon was used as this presents
the worst-case scenario.
-27-
Part II -- OTHER INFORMATION
Item 1 -- Legal Proceedings
None
Item 2 -- Changes in Securities and Use of Proceeds
None
Item 3 -- Defaults Upon Senior Securities
None
Item 4 -- Submission of Matters to a Vote of Security Holders
(a) The registrant's 1999 Annual General Meeting of Shareholders was
held on May 13, 1999.
(b) Proxies were solicited by Registrant's management pursuant to
Regulation 14A under the Securities Exchange Act of 1934; there was
no solicitation in opposition to management's nominees as listed in
the proxy statement; and all of such nominees were elected for a one
year term.
(c) The following matters were voted upon at the Annual General Meeting
with the voting results as indicated:
(1) The Company Board Proposal.
The Company's Bye-Laws provide for a classified Board, consisting of
eleven members (which the Board may determine to expand to twelve
members) divided into three classes of approximately equal size. At the
Annual Meeting, the shareholders elected four of the eleven directors as
Class I Directors, who shall serve until the Company's 2002 Annual
Meeting.
-28-
(2) The Company's Auditors Proposal.
Proposal to appoint Ernst & Young independent auditors of the Company
for the 1999 fiscal year.
Votes For Votes Against Votes withheld
--------- ------------- --------------
19,486,201 4,479 9,217
(3) The Renaissance Board Proposal.
The Company's Bye-Laws provide for a classified Board, consisting of
eleven members (which the Board may determine to expand to twelve
members) divided into three classes of approximately equal size. At the
Annual Meeting, the shareholders elected four of the eleven directors as
Class I Directors, who shall serve until the Company's 2002 Annual
Meeting.
(4) The Renaissance Auditors Proposal.
Proposal to appoint Ernst & Young independent auditors of Renaissance
for the 1999 fiscal year.
Votes For Votes Against Votes Withheld
--------- ------------- --------------
19,438,890 5,925 10,082
(5) The Renaissance Share Capital Proposal.
Currently, the Memorandum of Association of Renaissance (the "Renaissance
Memorandum") provides for minimum paid up share capital of $1,000,000.
Applicable
-29-
Bermuda regulations require insurers to have share capital of $1.25 million
in order to write long term business. While the Company has no present
intention to commence writing long term business, the Company believes it
is advisable to be in compliance with Bermuda regulations to be well
positioned to take advantage of any opportunity which may arise in the
future. The Company's Board has unanimously determined that it is advisable
and in the best interests of the Company's shareholders to comply with this
policy. At present, the actual paid up share capital of Renaissance is
$241,201,000 and therefore the amendment will have no effect on the issued
share capital of Renaissance.
In accordance with the Company's Bye-laws, approval by the Company's
shareholders is required to amend the Renaissance Memorandum. Accordingly
the Company, as the sole shareholder of Renaissance, will adopt an
amendment to the Renaissance Memorandum of Association deleting the word
"US$1,000,000" where it appears in paragraph 5 of the Renaissance
Memorandum and substituting therefor the word "US$1,250,000".
Votes For Votes Against Votes Withheld
--------- ------------- --------------
19,431,507 58,160 10,230
Item 5 -- Other Information
None
Item 6 -- Exhibits and Reports on Form 8-K
a. Exhibits:
Exhibit 27 - Financial Data Schedule.
b. Current Reports on Form 8-K:
The Registrant did not file any reports on Form 8-K during the
period beginning April 1, 1999 and ending June 30, 1999.
-30-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
RenaissanceRe Holdings Ltd.
By: /s/ John M. Lummis
------------------
John M. Lummis
Senior Vice President and
Chief Financial Officer
Date: August 16, 1999
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